PUNANI (Sri Lanka) - Inside, there are no victims, no killers, and no questions. There are only bright white lights and the click-clack of sewing machines in this new garment factory in war-torn eastern Sri Lanka.

Outside, the land is littered with memories from the island's quarter-century civil war: Five farmers shot dead in March. Fifteen buried in a ditch. A massacre in a nearby mosque.

"I have people who were in border villages and people who were combatants. They basically killed each other," said Theodore Gunasekara, general manager of Brandix's factory in Punani, which lies on an empty stretch of road 13 miles (22 kilometers) northwest of the coastal city of Batticaloa. "There is a lot of bad blood. When you come into Brandix, you leave the past behind."

Hostilities ended in eastern Sri Lanka nearly two years before the war reached its brutal conclusion in May, making the region the front line of Sri Lanka's postwar revival.

There have been signs of progress. Hotels are expanding as Sri Lankans from the south flock to an area they haven't been able to safely visit in nearly three decades. Rice and dairy production are rising. Bridges, built with Saudi, Chinese and Japanese money, are being inaugurated. Locals say they can watch tarmac roads grow by hundreds of yards (meters) a day. At night, the lights of small boats flicker in the dark sea: People are fishing again.

Yet growth has not eased the ethnic tensions that fueled the conflict. Nor has prosperity filtered down to the streets, where Sri Lanka's peace will ultimately be won or lost.

Hope that Sri Lanka will enjoy a quick peace dividend has helped send Colombo's main stock index up nearly 50 percent since the end of the war. But peace alone won't guarantee lasting growth, critics say. Also needed: more foreign investment and tourism revenue, companies getting access to larger markets, and the government shifting spending from the military to development and tax cuts.

By these measures, Sri Lanka's prospects look less promising.

Last year, Sri Lanka got $889 million in foreign direct investment. During the first half of this year, it got just $252 million, according to the Board of Investment. Officials say the decline was largely caused by the global financial crisis, which dried up financing for risky markets. They expect investment to rebound in 2010.

But a frustrating tangle of permits and licenses, persistent corruption, and a quiet sense that anti-Western feeling is rising haven't helped either, foreign diplomats and businesspeople say.

The government's brutal conduct at the end of the war may end up costing Sri Lanka market access. Europe is expected to decide in January whether to revoke Sri Lanka's duty free access because of alleged human rights violations, which would hit the nation's $3.3 billion garment industry hard.

Sri Lanka is also not in any hurry to dismantle its war economy. The military now employs about 250,000 young people who would have a hard time finding jobs elsewhere. The government said in October it wants to raise military spending by 20 percent, a move it justified to the IMF by saying many troops are needed for nonmilitary activities, like mine clearance.

The government has made a special effort to develop the east long claimed by the Tamil minority as part of their historical homeland in an attempt to turn the province into a model for the nation's postwar development.

Last year, provincial elections were held and now officials are trying to lure investors with hefty tax breaks and cheap land. The Ministry of Investment has signed nine deals in the east under a special incentive program and 18 more are in the works. Donors have poured in at least $500 million in international aid.

Since May, kidnappings and extortion have also decreased. Last year, 137 people mostly businessmen targeted for ransom money were kidnapped in Batticaloa district, 19 of whom were later found dead. So far this year, 31 have been abducted for ransom, and most have been released, according to the Foundation for a Peaceful Co-Existence, a local NGO that tracks violence.

But more than two years after the conflict ended in the east, many still say they are little better off economically or politically than they were during the war, which pitted the aggrieved ethnic Tamil minority against majority Sinhalese.

Shopkeepers say people still don't have money to spend. In some cases business has actually gone down because of Sri Lankans overseas sending less money home, the rising price of gold and increased competition.

"There is not much difference between wartime and now," said Mohammed Fatullah, 40, who runs a dress shop in the port town of Trincomalee. "People need jobs and money for my sales to increase."

The region is awash in land disputes, which are exacerbating ethnic suspicions and slowing development.

Local Tamil politicians and business people also complain the Sinhalese-run central government wields too much control over economic development. Many fear the government will use its influence to further dilute Tamil regional power, by favoring Sinhalese business owners and bringing in Sinhalese employees.

"Yes roads and bridges are being made, but who is doing it?" said R. Rajarammohan, head of Trincomalee's Chamber of Commerce. "Even the employees come from outside. If we are going to improve the economy, there must be a sure method where the existing business community is given a chance to participate."

Brandix, Sri Lanka's largest garment exporter, was the first to open a garment factory in the east after hostilities ended. Today, the $2 million factory is a hopeful outpost for the young women in the area, who say they have no other job options, and for officials eager for prosperity to put to rest decades of ethnic and religious strife.

But the 16-month-old factory is propped up by hefty subsidies and has yet to turn a profit.

It gets cheap land from the government and a five year tax holiday on 70 percent of Brandix's overall revenues. USAID helps pay for training.

Monthly expenses are about $70,000, and in good months, revenues are close to $30,000.

Executives hope that will change soon, as the global economy recovers and employees get faster and more experienced.

They say the Punani factory is a testing ground to see if they can make the business work in former conflict zones in the East and North, which offer untapped labor pools to an industry that has struggled to find workers.

It employs 200 Tamils, 112 Sinhalese and a few dozen Muslims. The managers are Sinhalese and must speak to Tamil staffers through a translator.

At first, the girls stuck with their own. Months of team-building exercises think volleyball games and dance parties and a zero-tolerance policy for ethnic slurs have helped blur those lines. Two young women who made racial comments were fired.

Outside the factory on a recent Wednesday, 41 young women sat at long metal tables. Most had traveled one to two hours to get here. War ended their education and killed their loved ones. Some were kidnapped by rebels to serve as soldiers and lost their childhoods too.

Now they want jobs.

"There are no job options for the young people in my village," said Kumarasamy Thanapriya, 19, whose father doesn't earn enough to support the family of 5. "I haven't learned any skills. There's no way I can do anything. We came here to learn."

Erika Kinetz

I am the Shanghai correspondent for the Associated Press. I write mostly about transnational criminal networks thiving in the shadows of China's rise, with specific attention to the opioid trade, counterfeiting and money laundering.